Since I was little girl, I’ve wanted my very own small-ish craftsman style house with a white picket fence and a luscious green lawn. Heck, I even started a blog which focuses on my quest for home ownership. But the more research I do, the more this question pops up: Should I buy a house?
The media makes a strong case for home ownership. The government promotes home ownership in the way of tax breaks. Most personal finance bloggers also lean toward ownership of property as being more financially savvy than the endless renter who squanders their money away each month. I’ve written a few posts comparing and contrasting renting versus buying with the hope of resolving this burning question that I just can’t seem to answer definitively.
So, should I buy a house? The answer just isn’t very cut and dry so I’m again comparing and contrasting the benefits of each:
Yes, yes, I should buy a house if…
- I plan on living in the area for 6 or more years. Most home owners will agree that it doesn’t make much sense (at least not anymore) to flip houses short of 5 or 6 years. Since most people need a mortgage in order to buy a house, those first few years of payments are only applied to interest (even on a 15-year loan).
- I’m paying cash. Not many people can say they paid for their home in cash. However, it makes sense to buy a home if you have the full amount rather than continue renting (unless your rent is so low that investing the lump sum is more profitable).
- I’ve saved up at least a 20% down payment. A large down payment means a smaller mortgage and a better APR.
- The rent vs. buy calculators show it’s a better investment than renting. I love using finance calculators to compare the home prices in my area to my current monthly rent. They often predict when and if it is a better financial move to rent or buy. Currently in my neighborhood, it is better for me to rent for 30 years than to buy a home. However, if I moved a few miles south or east, it would be a better idea to buy (but I wouldn’t want to!)
No, no, I should not buy a house if…
- I’m planning on leaving the area within a few years. Trying to resell a property only a couple of years after purchasing it will not be very profitable. And, if the housing market stays flat, it may be too difficult to sell it.
- I’ve not saved any money towards a down payment. Since the housing boom and bust, most banks want to see some kind of a down payment, preferably 20%.
- The houses are 8 to 9 times my income level. In my current neighborhood where I’m renting, homes are selling for an average of $600,000. No, I’m not making this up nor did I accidentally add one too many zeros.
- The rent vs. buy calculators show that it isn’t very profitable based on the prices of homes compared to my monthly rent. According to Michael Bluejay (he’s an incredibly smart guy) you can multiply your monthly rent by 240 for a ballpark of when it just isn’t affordable to purchase a home. So if you pay $1,000 a month for rent and homes in your area are going for around $180,000, you should buy! However, if homes in your neighborhood sell for $600,000 and your rent is $2,195, you should continue to rent! The catch here is that I’d have to invest the difference to make this a more profitable choice.
Obviously the answer for me is no, I should not buy a house. However, under different circumstances, such as I move to a more reasonably priced area and decide to stay there for a while, then buying may be a better option.
If you compare rental prices and home prices in your area, which makes more sense using the 240 calculation?
19 Comments
If you are not sure, then continue saving. Down the road, you may find that you have saved up say 40% downpayment. Then, the decision becomes a no-brainer!
@Mr. Credit Card – I think the biggest deciding factor is I don’t want to buy a house where I currently live. I want to check out some cities north of me and possibly make a move – less traffic, fewer people, better air quality. 😉
I really get a strong sense that you really want to buy a house, but the fundamentals don’t work out so you are being rational. Is that a safe guess?
The one positive thing people don’t tell you about homeownership is that once you sign the papers and move into your own house, the feeling is PRICELESS! You will feel like the queen of the castle, and every single upgrade and thing you do will be a labor of love. You will love owning your own home. Your work and income will give new meaning to paying down that mortgage. You will feel alive.
20% down, and have another 10% cash buffer. If you got that, and you plan to be there for 5+ years, go for it.
@Financial Samurai – Exactly. I really do want to own a home, but right now it doesn’t make sense, especially since I’m thinking I don’t want to live in my city for another 6+ years. I’m thinking more north (but probably not San Francisco – too expensive! 😉 )
@IPA – Renting in a different town for 6 months is an excellent option and what I will most likely have to do when we make the decision to move. Although, that decision is still a few years away (like 2 or 3)! As for purchasing, it’s still a goal of mine, but a much more distant one. 😉
I applaud your decision not to buy a house. There is still a lot of social pressure to do so even if it doesn’t make financial sense. Everyone I know who bought during the past 5 years regrets it.
I’m interested to see the 240 rule. The traditional metric was the same except the number was 100 times rent, not 240.
Back in December, I did a little experiment in my neighborhood. Although I couldn’t find a place the same size as my apartment, I found one 25% smaller down the street. Even with a 20% down payment and a 30 year fixed mortgage, downsizing would cost me $200 more per month just counting taxes and my mortgage payment. That doesn’t count realtor fees, moving expenses, or paying a landscaper instead of having that included in my rent. In addition, as a smart homeowner I would need a savings account with several thousand dollars in it to cover the expensive things that need replacement periodically, like fences, roofs, and upgrades of bathrooms and kitchens.
@Jennifer Barry – It’s hard for me to make a case for buying in areas where homes are still much more expensive than rent, which is where I live now. I’m not really sure how the 240 rule came into place, but that number alone means I’ll be renting for a little while longer. It’s good to hear that you priced homes in your neighborhood and compared renting with buying. Sometimes renting makes more sense!
I really like my house. First I rented for over 5 years, and I have to say, owning a home with forced equity has been a great net worth builder for a middle income guy like me.
An advantage that you have today is that the housing market bubble has popped! How awesome is that, you get to get into the market while both houses and mortgage rates are low!
Either way for you is a win-win though. Based on your writings, I know that you and your husband have great financial sense!
@Money Reasons – yes, there’s always that equity thing with owning a home. But it’s no guarantee, as some people are finding out the hard way. I like the idea of having a home paid off in full by the time I retire, but for now renting makes more sense for me. 😉
Take your time, there is no rush – and no reason to let societal pressures or other similar factors push you to do something that your gut tells you not to do just yet.
Yes, I do agree with commenters that the feeling when you buy your first place is amazing. Really amazing. Thing is, as many people have found out, these decisions need to be made when the fundametals are right. When the purchase is made at the right time, that amazing feeling won’t be fleeting but it will last for a long, long time! 🙂
@Squirrelers – I’m sure it’s a great feeling. But I’ll bet a lot of people are feeling horrible about their decision right about now. I also think that buying a home needs to be more than feeling great; you need the financial stability, 20% down, and a stable income (or large savings account). I’ll be ready in a few years. 😉
Hey thanks for that very nice tip from Michael Bluejay!
In my opinion, if you have a stable job and if you plan on staying for a while, this might be the best time to buy a house.
RE market is not going to be like this forever and we’ve been through similar times before. Economic cycles – prosperity, recession, prosperity, recession…
If you can afford to buy when times are tough, you’ll reap rewards during periods of prosperity.
@MoneyCone – I’m sure that housing prices will eventually go up a bit, but I’m not too worried about a repeat bubble anytime soon. As long as I get in within the next 5 years, I should be okay. I don’t see housing booming in my area within that time frame (we were one of the harder hit states and the states where prices spiked enormously.) I also think that the loan restrictions that are in force now, as in you actually need a down payment and good credit, will keep the market flat for a few years.
To me the main issue, is do you have a 20-25% down payment? Will you be able to afford the mortgage payments with certainty? In your case, I would look in the your area for under $500,000. I certainly wouldn’t buy if it would be too stressful.
@Barb Friedberg – Until I have my 20%+ saved, I won’t be jumping into home ownership. Since I’m not in a huge hurry (and really do want to move out of the city I currently live in) I think it is just smarter to wait a few more years. And yes, I will definitely purchase something under $500K!
Don’t forget it is a financial and psychological decision. 🙂
Hi Little House. I just started working for Sam at Yakezie.com and first wanted to thank you for all your help with the writing contest and 2nd for being such a supportive member of the network! It’s good you are weighing all your options carefully and are not rushing into buying a house. Knowing that you want to stay in one location for 5+ years is a hard thing to know and I agree it’s not worth the hassle of buying, packing, moving, reselling, packing, and moving all over again.
@Sydney – Great to meet you! Yes, buying a house is a big commitment and I’m just not ready to take the plunge until I know where I’m going to move. As for moving, the physical part is really a pain.
My wife and I are on a search for a house of our own. Luckily, we meet your criteria for a house purchase! We are still working on saving up the downpayment, but we should be there soon. 🙂